Morning comment: Brexit WP, ECB account, euro IP & US CPI

Chris Scicluna
Mantas Vanagas

While equity markets in the US and Europe followed Asian markets lower yesterday in response to Trump’s proposals for additional tariffs, investors appear today to have adopted a much more positive stance about the prospects for an eventual resolution of the conflict, even if reports suggest that high-level trade talks between the US and China are presently halted. Indeed, equity markets across Asia rebounded. As might be expected, after declining steeply on Wednesday, and despite a further weakening of the yuan through CNY6.69/$, China’s equity market has led the region higher with the CSI300 rebounding 2.2%. Other markets, however, have posted less emphatic gains during a session in which there were no top-tier economic data releases to divert attention. In Japan a weaker yen – through ¥112/$ for the first time since early January, helped the Topix to a comparatively modest 0.5% gain, while benchmark indices rose 0.7% in Hong Kong and 0.2% in South Korea. Meanwhile, with Brent crude having plunged more than $6 to $73pb in little more than 24 hours through to yesterday afternoon, oil prices have ticked higher, edging up about $74.50pb.

Looking ahead, UK politics will be in focus again this morning as Theresa May’s White Paper on exiting the EU will be released to inflame the anger of her party’s hard-core Brexiters.  In addition, the ECB will publish its account of the June monetary policy meeting where the Governing Council approved its plans to end its net asset purchases at year-end and issued new forward guidance on rates and reinvestments. And later today, US CPI figures for June should be closely watched, even if they are currently expected to be broadly well-behaved.

Euro area:
Most notable in the euro area today, perhaps, the ECB will publish its account of the June monetary policy meeting where the Governing Council approved its plans to end its net asset purchases at year-end and issued new forward guidance on rates and reinvestments. When Draghi unveiled those decisions, he was keen to emphasise that the Governing Council was unanimous in its support for numerous aspects of the policy statement. However, differences of opinion among the members about what that statement precisely meant have, perhaps predictably, now increasingly become clear. While at least one member judges the stated expectation that interest rates will remain unchanged ‘at least through the summer of 2019’ to preclude a September hike, others have made it known that, in their view, an end-year rate rise could come too late. Likewise, the Bundesbank has tried to kick back on suggestions that the national central banks could be instructed to undertake more active reinvestments of maturing principal in order to achieve monetary policy objectives. Of course, any ambiguity in last month’s policy statement will have been deliberate, and today’s account might provide more colour on the range of views, or indeed on what might soon be forthcoming (e.g an operation twist sometime, perhaps) on reinvestment policy.

Data-wise, there were no surprises from this morning’s final German inflation figures but a revision to the French numbers compared to the flash estimate. German CPI on the EU measure fell 0.1ppt from May to 2.1%Y/Y, but the equivalent French measure was revised down 0.1ppt on the month to 2.3%Y/Y, the same rate as in May. Nevertheless, the final euro area figures, due next week, still seem highly likely to confirm the flash estimates, with headline inflation up 0.1ppt from May to 2.0%Y/Y, but core inflation down 0.1ppt to just 1.0%Y/Y, still firmly within the range of the past four years.

Looking ahead, later this morning brings May industrial production for the euro area. Given the results from the member states, and thanks particularly to a surge in Germany, euro area IP looks set to rise by about 1.0%M/M to take the annual rate back about 2%Y/Y.  Nevertheless, given the drop of 0.9%M/M in April, the average for Q2 so far will be running about 0.3% below the Q1 average, suggesting that a further gain in June will be required to avoid a second successive quarterly decline in the industrial sector, which had represented the key impetus to accelerated GDP last year.

After last night’s World Cup elimination for England, today’s release of the Government’s White Paper on Brexit, a 120-page document setting out in more detail the plan agreed at last week’s Cabinet meeting for the future relationship with the EU, seems unlikely to improve the mood. The White Paper will include more detail on the proposed UK-EU free trade area for goods, via a “common rulebook” with the EU, and a “facilitated customs arrangement” intended to remove the need for a hard border in Ireland, as well as set out proposals for an improved ‘eqiuvalence’ regime for financial services, something that, by implication, will mean diminished market access for UK-based firms. Indeed, while the White Paper will, for the first time on the UK side, acknowledge the trade-offs between ‘taking back control’ and losing market access, plenty of scepticism will continue to abound over the feasibility of many of the plans, how acceptable they’ll be to Brussels – and the implications for the UK economy. And, perhaps more than anything, they will inflame the anger of the hard-core Brexiter Conservative MPs, who will next week again try to flex their collective muscle in the House of Commons when the Government attempts to push through its key trade and customs legislation.

Data-wise, today’s sole release focused on the UK’s other main preoccupation – house prices. And the RICS Residential Market survey released overnight carried a slightly more positive tone than of late. In June, the net balance of survey respondents reporting price increases turned positive for the first in five months, albeit only rising modestly from -2% to 2%. Near-term price expectations also stabilised, having also been on an a downward trend in recent months – the relevant index came in at 0%. This stability was also supported by indications of slightly improved market activity: the indices for new buyer enquiries and new instructions to sell both rose by 5ppts to -1 and 10 respectively, with the former representing the highest reading since the summer of 2013. Nevertheless, the level of agreed sales continued to decline, recording a fifteen consecutive reading below zero. So overall, while the survey gives some hope of somewhat better housing market momentum in the near term, which would also be consistent with the recent recovery in the retail sales data, the improvement so far appears somewhat limited. And with Brexit uncertainty remaining high, sentiment in the market could easily deteriorate again.

Today brings the most notable new economic data of the week with US CPI inflation for June. Gasoline prices were stable in June, so the energy component should settle after increasing noticeably in April and May. But the core component might edge up by a little more than the recent trend of little more than 0.15%M/M. So, on a rounded basis, both headline and core CPI are expected to rise about 0.2%M/M, which should leave the respective annual rates at 2.9%Y/Y and 2.3%Y/Y, both 0.1ppt higher than in May. If so, the annual rate of headline CPI will reach its highest rate since 2012, while core inflation will reach its highest since January last year. And robust economic activity in Q2 might suggest that the risks are skewed to the upside. Among other releases, the usual weekly claims data are also due.

A quiet day for data in Australia saw the Melbourne Institute report that consumers’ expectation of inflation had fallen to 3.9%Y/Y in July from a 10-month of 4.2%Y/Y in June. This leaves inflation expectations – habitually well above actual inflation – sitting close to their average level over the past two years.

New Zealand:
The only report in New Zealand today was Food Price Index for June. The index rose 0.5%M/M, largely driven by a seasonal 5.8%M/M jump in fruit and vegetable prices. This saw annual inflation nudge only slightly higher to 0.2%Y/Y from -0.1%Y/Y in May.

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